Check Leases for Eight Tax Credit Protections and Privileges
Before you sign a lease giving a household the right to occupy one of your low-income units at a restricted rent, you’ll want to be sure that the lease and any addenda give you the authority you need to keep the site in compliance. For instance, if your site isn’t 100 percent low-income units or if your state requires it, you’ll want to require the household to give you documentation to prove that it’s still qualified at recertification. Also, after you sign the lease, a change in circumstances may make it possible to increase the household’s rent without violating the tax credit law. When that happens, you’ll want the right to charge more rent instead of being forced to stay with the rent you committed to in the lease.
To protect your ability to comply with the tax credit law, and to get the right to increase rents mid-lease under certain circumstances, you should make sure your leases with low-income households include the following provisions.
1. Require Households to Comply with Recertification Requirements
As part of the Housing and Economic Recovery Act (HERA) of 2008, recertification isn’t required in 100 percent LIHTC buildings. However, this means that you must recertify your rent-restricted tenants if your project is not 100 percent LIHTC. Also, it’s important to note that state agencies have the authority to impose additional requirements upon LIHTC projects and may require income recertifications after completing the initial income certification at the time the household moves into the low-income unit. For example, a state agency may require a one-time income recertification after the first year of occupancy.
State agencies may place such restrictions on an owner for a variety of reasons. For example, the state agency may have little confidence that an owner can consistently identify income-qualified households without frequent technical errors, or is willing to provide sufficient due diligence. In other cases, the state agency may be providing financing and, as part of its own internal controls and due diligence, is ensuring that the state’s funds are used for the purposes intended.
If you have a mixed-income site or your state agency requires recertifications, your lease should require households to attend a recertification interview, provide sources and documentation to verify income and assets, and sign a new income certification form. The lease should also make clear that a household’s right to occupy the unit depends on their continued eligibility as a low-income household. It’s a good idea, as well, to mention the next recertification date and the date you’ll contact the household to begin the recertification process—which should be 90 days before the recertification date. Finally, the lease should say that failure to comply with this provision is a material breach of the lease that may result in nonrenewal or eviction.
This lease provision is important because if you don’t recertify a household, the owner won’t be entitled to claim credits for their unit. By making annual recertification a lease requirement, you let the household know that it must cooperate with you or risk losing their unit.
2. Ban Transient Airbnb and Sublet Use
Households that temporarily need to live elsewhere may decide to sublet their units while they’re gone. Or as Internet-based apartment-sharing services such as Airbnb have become more popular, households may seek to rent out their unit to strangers for short stays to supplement their income. Although many owners and managers of conventional sites allow this practice, letting low-income households sublet units at a tax credit site could lead to noncompliance.
The tax credit law prohibits transient use of LIHTC units and requires that a unit be continuously occupied, meaning that the unit must be in the household’s possession at all times. In addition, tax credit law requires you to certify the income of all households that occupy your low-income units. But if a qualified, low-income household sublets their unit, you’ll have a situation where the unit’s actual occupants were never certified. As a result, your state housing agency may cite you for noncompliance. And if you don’t correct the problem, the owner’s tax credits may be at risk.
Your lease should make clear that households don’t have the right to sublet or assign their units or any part of them. The lease should also warn households that subletting or assignment is a substantial violation of the lease.
3. Ban Households from Adding People Without Your Approval
Your lease should state that management must be notified if any minor children join the household, with proof of custody, and that there must be prior permission from management for any adult who joins the household. Your lease should also make clear that failure to comply with this provision is considered fraud and is a substantial violation of the lease.
If a low-income household invites unauthorized occupants—such as relatives, boyfriends, or girlfriends—to move into their unit, it can put your tax credits at risk. Adding a new occupant to a household may make the household go over-income, which means you’ll have to follow the next available unit (NAU) rule to keep the owner’s tax credits safe. And you may wind up with more people living in a unit than your occupancy standards allow. You must certify the new occupant’s income and, if the household is still qualified, include the new occupant on the lease.
4. Require Households to Cooperate with Unit Transfer Rule
Your lease should give you sole discretion to grant or deny transfer requests. It should also let households know up front that you’ll deny their requests if you believe a transfer may lead to noncompliance. The lease should also get households’ agreement to honor your requests for information, documentation, or interviews after you grant a transfer request. Finally, it should make clear that any transfer request you grant is contingent on the household’s cooperation.
When households request unit transfers, you can violate the tax credit law if you’re not careful. That’s because you must follow the unit transfer rule, which applies differently depending on whether you’re moving a household to another unit within the same project or to a different building at the site.
Residents of 100 percent LIHTC projects, where a household’s current income is not known, can transfer between buildings within the same project. At mixed-income projects, residents may transfer within the same building without requalifying for the LIHTC program. In this case, however, an owner must check the impact the transfer may have before approving the transfer. When an existing tenant moves to another unit within the same building, the status of the two units swaps. Thus, if a qualified tenant moves to an “empty” unit, the new unit ceases to be “empty” and becomes a qualified unit. The original unit will then be deemed “empty.”
If a current resident asks to move to a different unit in a different building in the same project, a similar rule applies as long as the tenant’s income doesn’t exceed 140 percent of area median income (AMI). For purposes of this test, if on IRS Form 8609 (Low-Income Housing Credit Allocation and Certification), the owner elected “No” on line 8b, then the owner has chosen to treat each Building Identification Number (BIN) as a separate project. In this case, a transfer would require a new certification and the tenant would have to be qualified at the time of move-in.
5. Give You Right to Raise Rent When Utility Allowances Decrease
Your lease should explain that the household’s rent is based on the maximum allowable rent for their unit less their utility allowance. It should then say that both the maximum allowable rent and the utility allowance might change during the term of the lease, which may cause you to increase the rent. Your lease should say that any rent increase will be made in accordance with the law, and that you’ll give households proper notice (as required under state or local law) of any rent increase.
The maximum allowable rent you can charge a low-income household is affected by the unit’s utility allowance. If the utility allowance increases, the maximum rent you can charge decreases, and if the allowance decreases, you can increase your rent without violating the tax credit law.
6. Give You Right to Raise Rent When AMI Rises
Unlike HUD subsidy programs in which tenants pay 30 percent of their income for rent, the amount of rent paid by a LIHTC resident is not necessarily based on the actual income amount of that particular household. LIHTC rents are not adjusted upward or downward when a resident experiences an increase or decrease in household income. Rather, the maximum allowable rent is based on rent derived from HUD-issued income limits.
If the rent limits for the county in which your project is located changes in the middle of a lease term, and the maximum rent that can be charged goes down, the owner must reduce the rents of all low-income units to conform to the new limits, regardless of the lease terms. You’ll have 45 days to implement the new rent amount. However, in situations in which rent limits rise during the term of a resident’s lease, you must comply with local landlord-tenant law in order to raise the rent in the middle of a lease term.
In this situation, your lease is likely to govern, and it should tell households that their rent is based on area median income and may change during the course of the lease. It should say that any increases will be made in accordance with the law, and that you’ll give households 30 days’ notice (or more, if your state or local law requires it) before increasing the rent.
This provision can boost revenues because the maximum rent the tax credit law allows you to charge low-income households is tied to AMI. So when AMI increases, you’ll want to increase your rent as well. By including a lease clause that lets you increase rents mid-lease if AMI increases, you won’t have to accept less than the maximum allowable rent for the rest of a household’s lease term.
7. Give You Right to Raise Rent When Households Go Over-Income
If you have a mixed-income site, in the event that you follow the next available unit rule because a household’s income rose above 140 percent of the LIHTC program’s income limits and you rent a market unit to a qualified, low-income applicant, your lease needs to give you the ability to increase the over-income household’s rent to market rate with a certain number of days’ notice, as required by your state or local law. It should also specify that households will be considered over-income if their income exceeds 140 percent (or 170 percent, if your site is deep rent-skewed) of AMI.
When a low-income household goes over-income, you must follow the NAU rule by renting the next available comparable or smaller unit in the building to a qualified low-income household. At a mixed-income building, you may have to use a market-rate unit to satisfy this rule. If you do this, the market-rate unit you use becomes a low-income unit, swapping its status with the over-income household’s unit. If you can’t increase the rent you charge the over-income household, you’ll be stuck with a household that pays a restricted rent while living in a market-rate unit.
8. Require Households to Maintain Unit’s Smoke Detectors
A disabled or inoperable smoke detector is one of the most common violations cited by state housing agencies during tax credit site physical inspections. This is because residents often remove the smoke detector’s batteries or otherwise disable it because of nuisance alarms caused by cooking fumes or steam from hot showers.
While choosing smoke detectors that are less likely to be triggered by cooking or hot showers is a good first step in keeping residents from disabling the devices, it’s also important to require residents to maintain their units’ smoke detectors in good working order. Your lease should state that removing batteries from or disabling the smoke detector is a substantial lease violation that may lead to eviction and that the tenant is responsible for its maintenance during tenancy.